Back to the Future, Part 1: Farm economy in 1980s vs. 2010s

Summer is the season of ag banking and lending schools. One of the trends being observed at these conferences and schools is that the 1980s lenders are phasing off into the sunset of their careers. In a recent session, I asked the lenders in the room to stand if they were less than 42 years of age. Interestingly enough, 70% of the lenders stood up. This is your new ag lender. Some have a farm background, but many do not; however, they are eager to provide the best service and counsel to you. One question during a forum discussion put me and other professors in the Back to the Future time machine to discuss the similarities and differences in the farm economy now compared to the 1980s. Some of the discussion from the professors on the panel representing Kentucky, Georgia, Clemson, and, of course, Virginia Tech is summarized below.

First, farm debt was much more dispersed in those days in the 1980s on many farms in the midsize range. Today, farm debt to asset ratios, while at a record low of 10-12%, are much more concentrated. Of the approximately 2.1 million farms and ranches in the U.S., 270,000 farms that generate 80% of the production carry 60% of the total farm debt. Today, much of the debt repayment sources are interconnected. That is, one farm may have contracts or business arrangements and obligations with another, who has similar agreements with additional operations. Thus, if one large agribusiness, farm or entity gets into financial difficulty, it can ripple throughout the lender’s portfolio. For this reason, lenders will examine third-party counterparty risk, particularly for large agriculture producers.

Both eras have been dominated by inflated land values. The earlier time in the 1980s can be described as a credit bubble. That is, farms borrowed to maximum limits to purchase land as a hedge to inflation that was 10-12% annually. Today, in contrast, inflated land values are like an asset bubble, fueled by large cash down payments from profits. In other words, producers have more cash and equity in the game. Individuals from 60-90 years of age have purchased land as a result of low returns on other comparable investments. In both eras, outside investment entered later in the accelerated land value cycles.

Credit bubbles tend to crash rapidly with steep declines. On the other hand, asset bubbles in real estate usually have a slower decline because producers have much more skin in the game, particularly if they have large working capital reserves. Correction in land values and cash rents will only result this time if multiple years of negative profits become a trend because farmers are the eternal optimists who think next year will be better. Now stay tuned for more discussion in our next column!